Emerging Markets: What Has Changed

(from my colleagues Dr. Win Thin and Ilan Solot)

1) The Brazilian central bank has shown its hawkish side; the focus turns to FX now.

2) Taiwan’s new stimulus plan disappointed markets by not surprising on the upside.

3) Indonesia may start stepping up support for the rupiah soon.

4) Bank of Thailand resumed the easing cycle.

1) The Brazilian central bank has shown its hawkish side; the focus turns to FX now. Bacen accelerated the pace of hikes to 50 bp as we had expected, but against the majority of forecasters. The most notable development was the committee’s vote count: unanimous, which is in contrast to the April meeting when 2 of the 8 members voted for maintaining rates stable. 

Now the focus shifts towards FX markets. Before the COPOM announcement yesterday, FM Mantega said that the he sees “no reason to intervene in FX markets.” Now, intervention on Friday will not only provide an important signal about how they will manage the currency, but it will also directly contradict Mantega. This would be a welcome development, in our view, as it will show that Tombini is again trying to establish the central bank’s independence and regain his battered credibility.

2) Taiwan’s new stimulus plan disappointed markets by not surprising on the upside. The new measures include allowing insurers to invest in infrastructure projects, establishing a 'cash for clunkers' scheme, starting an ‘angel fund’ to invest in private companies, subsidizing energy-saving home appliances, and revising the capital-gains tax rules on stocks. 

President Ma’s disapproval rating is around 70%, largely due to the sluggish economy which is forecast to grow just 2.4% this year. Like Korea, Taiwan is sensitive to competitiveness loss against Japan from the weaker yen, which will aggravate the already weak economy. We prefer to play TWD from the short side in relative value trades against other EM Asian currencies.

3) Indonesia may start stepping up support for the rupiah soon. Earlier this week, central bank governor Martowardojo said that despite high inflation over the last few months, “interest rates are not in a condition to be lowered.” Before that, he added that the bank would strengthen the policy mix using interest rate, exchange rate, and macroprudential policies to achieve the inflation target.

 In addition, a senior central bank official was quoted as saying that there is room to raise the FASBI rate (deposit facility) to maintain capital inflows and support the ailing rupiah. Indeed, central bank deputy governor Sarwono has already noted that the FASBI rate can be used “to manage inflows from leaving the country due to uncertain fuel policies.” In short, it seems as if a combination of higher deposit rates plus a stronger currency may be the policy mix for the near term. A stronger IDR could catch many investors who are short or underweight Indonesia on the back foot.

4) Bank of Thailand resumed the easing cycle. The bank delivered its first rate cut since October, 25 bp to 2.5%. Resumption of the easing cycle was long overdue, but it seems that policymakers wanted to see how the economy fared after the distortions from the flooding played out. Data hasn’t been very uplifting, and so the BOT is likely to continue cutting rates ahead. 

 Consumption and investment slowed sharply in Q1 while IP contracted -3.8% y/y in April. Inflation continues to fall, with headline CPI at a cycle low 2.4% y/y in April. More importantly, targeted core inflation is at its cycle low of 1.2% y/y, very near the bottom of the 0.5-3.0% target range. Officials are also signaling greater willingness to combat baht strength, and rate cuts should help here.